Gas & Oil Exposure Causes Downgrade On Apollo Investment Corporation

• Apollo Investment Corp. AINV shares are down 17 percent in the last three months, and are trading close to the low-end of their 52-week range of $6.10 - $8.87.
• Cantor Fitzgerald’s David J. Chiaverini downgraded the rating for the company from Buy to Hold, while reducing the price target from $8 to $7.
• The company has very high oil and gas exposure, which is significantly higher than the industry average, Chiaverini said.

Apollo Investment has industry-leading oil and gas exposure of 16 percent, as compared to the peer group average of 5.9 percent. Analyst David Chiaverini commented, “We fear that BDC portfolio companies exposed to oil and gas may face valuation write-downs in coming quarters given the still-low price of oil despite last week’s bounce off the lows.”

The ongoing disruption in the oil and gas market may present attractive investment opportunities. Lenders that have sufficient capacity available would be poised to take advantage of the disruption.

Chiaverini added, however, that Apollo Investment’s net leverage level remains higher than that of its peers. “We believe this relatively high leverage level may limit Apollo’s ability to take advantage of potential energy market disruption that may come to a head in the fall and winter months.”

The analyst mentioned that Apollo Investment’s credit quality continues to be “decent” despite the very high oil and gas exposure. Moreover, Apollo Investment’s dividend appears to be sustainable at least through 2016.

Chiaverini wrote that although Apollo Investment’s collateral coverage is solid, “we expect these investments to require a heightened level of management attention and possibly distract the team from building on the success it’s had in transitioning the portfolio over the past few years.”